Investing in Penny Stocks
Are the OTC transactions that the Wolf of Wall Street was peddling really all that bad?
This article was originally posted at vigtec.io/learn.
Whether you were inspired by the film Wolf of Wall Street or you’ve ever had a limited amount of investment capital available, you’ve probably heard of penny stocks.
For those of you who haven’t heard about penny stocks, you’re probably wondering “wow…I can buy stocks for a penny?!” Not exactly.
Penny stocks are stocks of small companies that trades for less than $5 per share. Though most penny stocks trade via over the counter (OTC) transactions through the OTC Bulletin Board (OTCBB) or through the privately-owned OTC Markets Group, some penny stocks also make it to the New York Stock Exchange.
While investing in penny stocks can trigger sizable gains, they’re also equal risks of losing a significant amount in a short period.
Penny stocks offered on the marketplace are often growing companies with limited cash and resources. Since these are primarily small companies, penny stocks are most suitable for investors who have a high tolerance for risk.
How come they fail or are so risky if they’re less than $5 per share, you might ask?
A few reasons why penny stocks are risky are:
- Lack of information available to the public when it comes to making an informed decision to purchase a stock
- No minimum standards for stocks that need to be fulfilled in order to remain on the exchange
- Lack of company/stock history makes it difficult to determine a stock’s potential
- Low liquidity levels cause some traders to manipulate the prices
- High chance of fraud or bankruptcy of the underlying company
While there are several reasons to be cautious with penny stocks, don’t let that deter you from investing in some.
In the best-case scenario, you can be helping smaller companies gain access to public funding and access to a larger marketplace listing through your investments. The lower price also allows a significant upside in share appreciation.
So, if you’re thinking of taking on penny stocks as your next adventure, remember to set a limit on how much you are willing to lose and don’t pay commissions when you don’t have to. Most importantly, remember that the penny stock market is full of scams. Ignore the noise and do your research.